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China's booming economy may be weakening

Changshu Zhongjiang Import-Export Co., a clothing exporter in Suzhou, west of Shanghai, is accustomed to double-digit annual revenue growth. This year, with its key U.S. export market limping, sales have fallen an alarming 10 per cent.

By JOE McDONALDThe Associated Press

Wed., Aug. 6, 2008

BEIJING–Changshu Zhongjiang Import-Export Co., a clothing exporter in Suzhou, west of Shanghai, is accustomed to double-digit annual revenue growth. This year, with its key U.S. export market limping, sales have fallen an alarming 10 per cent.

Changshu, with 580 employees, has avoided layoffs but profits will be down as much as 85 per cent from their 2005 peak, said Xue Jianfang, the company's vice president.

"We are not going to switch to domestic sales, because the domestic market is even worse," Xue said. "There are still some profits in this industry, but they are squeezed.''

China's booming economy, a bright spot amid global gloom, is weakening in areas ranging from clothing exports to auto sales to manufacturing. Communist leaders who have spent a year fighting politically dangerous inflation are scrambling to change course and avert job losses by revving up struggling industries.

"Growth concerns have definitely become more important," said Grace Ng, a JPMorgan Chase & Co. economist. "I don't think they have come to the definite conclusion that we are having a sharp slowdown in growth, but they are clearly cautious. They do not want to re-ignite inflation pressure.''

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Companies are suffering a triple blow from record-high costs for energy and raw materials, slowing foreign demand and a rise in China's currency, the yuan, which makes their goods more expensive for American consumers.

A slowdown could have a global impact if China buys less factory equipment from the United States and Europe or oil and raw materials from developing countries. It would set back hopes that as U.S. demand falters, China would fill the gap in global growth.

Analysts expect economic growth to fall as low as 9 per cent this year. That's well ahead of other major countries but a sharp decline from 2007's 11.4 per cent. That worries Chinese leaders, who need to create jobs and satisfy urban workers who have come to expect steadily rising living standards.

Premier Wen Jiabao and other top economic officials could be politically damaged if they fail to cope with the problem.

"I think there is a bit of gridlock and not a lot of consensus about what to do," said William Hess, chief China analyst for the consulting firm Global Insight. "For some senior leaders who have come out and taken personal responsibility for the issues, they face some career pressures.''

Textile exports fell 4.2 per cent in June from the same month last year, a serious blow to an industry that employs millions of people. Overall export growth in June was 18.2 per cent, down from May's 28 percent rate.

Two weeks ago, the Communist Party's ruling Politburo issued an economic plan that switched its stance from just taming prices to a dual mission of "ensuring stable and fast growth and preventing inflation.''

Last week, in a first step to help individual industries, the government raised rebates of value-added taxes on textile exports by 2 percentage points to 13 per cent. That reversed a decision last year to cut such rebates in hopes of narrowing China's swollen trade surplus and reducing a flood of export revenues that is adding to pressure for prices to rise.

On Wednesday, the government extended support to small businesses by boosting lending limits for local banks by 10 per cent.

Also this month, auto consulting company J.D. Power and Associates cut its forecast of China's 2008 auto sales from 6.2 million units to 5.95 million. It said higher gasoline prices were prompting drivers to delay car purchases. That would be a blow to global automakers that are counting on China's fast-growing market to drive sales at a time of slumping demand in the United States and Europe.

"In the second half, exports will continue to slow down while consumption will remain stable and investment drop slightly," Liu He, vice minister of the Communist Party's Central Leading Group for Financial Affairs, said in comments published in the party newspaper People's Daily.

Liu said Beijing was considering tax rebates for labor-intensive industries and changes in energy pricing but gave no details.

The new growth strategy is a departure for a government that has spent two years trying to slow rapid growth in exports, credit and investment. Beijing has repeatedly hiked interest rates and imposed curbs to cool a boom in construction and investment that it worries could lead to a debt crisis.

Consumer inflation eased in June but prices still were up 7.1 per cent from the same month last year. That was down from May's 7.7 per cent though well above the official target of 4.8 per cent for the year.

Even as consumer inflation eases, the economy faces problems as Chinese companies are forced to pay higher costs for energy and raw materials. Prices paid by steel mills for iron ore have nearly doubled. The government added to companies' costs in June by hiking fuel prices to curb demand.

"The places that are feeling the effects previously were engines of job creation, and that's a big worry for policymakers,'' said Hess.

Elsewhere, some parts of China's economy are still healthy.

Retail sales in June turned in the strongest monthly growth on record, rising 23 per cent from the same month in 2007. Investment in factories and other assets rose 26.3 per cent in the first half from the year-earlier period. Economists say it might even be accelerating.

German engineering giant Siemens AG, which sells equipment for Chinese steel mills, power plants and factories, has seen no slowdown in orders, said Richard Hausmann, president of Siemens China.

"We are running at our capacity limits at the moment in supplying China with steel plants," Hausmann said. "This is really a boom.''

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